A Crisis Early Warning Model for Euro Area Countries
13 Pages Posted: 17 Dec 2019
Date Written: November 25, 2019
The article summarises the findings obtained in the estimation of an economic crisis early warning model for the euro area countries. These findings show that monitoring five variables that may indicate the emergence of macro-financial imbalances – current account balance, unit labour costs relative to the rest of the euro area, household indebtedness, corporate indebtedness and sovereign risk premium – helps facilitate the early detection of downturns in the euro area countries. As expected, the model points to a widespread euro area-wide increase in the probability of a decline in activity towards the middle of the last decade, just before the start of the Great Recession. Compared with the core euro area economies, the increase in crisis probability was much more pronounced in the periphery countries, driven by a worsening of the current account balance, growing private sector indebtedness and deteriorating competitiveness. In several of these economies, the probability of downturn predicted by the model heightened in 2011-2012, coinciding with the successive sovereign debt crisis episodes. Since then the probabilities of downturn have moderated substantially and are now low in most countries, albeit in some cases still above those observed at the turn of the century.
Keywords: early warning indicators, vulnerabilities, economic crisis forecasting
JEL Classification: C25, C33, E44, E58, G01
Suggested Citation: Suggested Citation